U.S. Expat Tax after President Trump's Tax Plan
12 January, 2018
Here's everything American expats need to know about President Trump's tax plan. Will your taxes go up or down? What about the Foreign Earned Income Exclusion? Here's my review of expat tax after President Trump's tax plan.
First, I note that US expats should see all of the personal income tax benefits that US residents received. For example, your income tax rate on ordinary income might go down 2 to 4% depending on your circumstances. I won't spend time on standard rates as I'm focused on expat taxes here.
What might benefit American expats is that Trump doubled the standard deduction. A single filer's deduction increased from $6,350 to $12,000. The deduction for Married and Joint Filers increased from $12,700 to $24,000.
The reason this will benefit many expats is that we often don't have a mortgage on our foreign real estate. Thus, we don't take a mortgage deduction and, therefore, don't usually itemize our deductions. The bottom line is that most expats take the standard deduction, which doubled.
Also, most expats don't pay tax on our salaries. We use either the Foreign Tax Credit or Foreign Earned Income Exclusion to avoid US tax on wage and business income. However, we do pay tax on our capital gains. The increase in the standard deduction will save you thousands in tax on your cryptocurrency and other investments.
This increase in the standard deduction is balanced against the loss of personal exemptions. If you have a large family with many dependents, you might end up paying more in tax.
Before the Act, taxpayers subtracted $4,150 from income for each dependent claimed. As a result, some expat families with 4+ children might pay higher taxes despite the increased standard deduction.
We also lost the moving expense deduction. This might have a big impact on new expats, especially business owners and those moving abroad for work. If you were itemizing while in the US, the year you moved you would deduct your moving expenses. These can be many thousands of dollars.
Trump's tax plan eliminates the moving expense deduction. While this is a one time deduction taken by expats in the year they go abroad, it can make a big difference on your US taxes paid that year.
When we look at expat taxes post Trump, we see some changes around the margin, but not the big shift we were hoping for. Companies moved to a "territorial" tax system where they pay US tax on US source income rather than on worldwide income.
But, there was no corresponding change for US individuals. We're still taxed on our worldwide income no matter where we live. The United States is the only major country which taxes it's expat citizens on foreign sourced profits and capital gains.
There was hope that both individuals and companies would shift to a territorial tax system. Unfortunately, expat voters must not have been a large enough voting block or made the necessary campaign contributions. We got the shaft and must pay US tax on all income no matter the source.
Also, FATCA reporting and FBAR filing requirements still apply. Thus, Americans remain persona non grata at most international banks.
This means we still must rely on the Foreign Earned Income Exclusion and Foreign Tax Credit to keep Uncle Sam out of our pockets. The Foreign Earned Income Exclusion increased for 2018, as it does each year to keep up with inflation.
The FEIE increased from $102,100 in 2017 to $104,100 in 2018. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200. If you qualify for the Exclusion, you can earn up to $104,100 in salary or business income and pay zero Federal income tax.
To qualify for the FEIE, you must be out of the US for 330 out of 365 days or a legal resident of a foreign country. With the shift to the territorial system for corporations, I expect the IRS to target those using the 330 day test.
As a result, we're recommending that our clients using the 330 day test to qualify for the Foreign Earned Income Exclusion work on becoming a resident of a foreign country in 2018. While this takes effort, moving to the residency test will allow you to maximize the FEIE this year and in the future.
Note that the IRS doesn't care where you become a resident any foreign country will do. You need to put down roots, get a residency visa, and make it your home base to qualify for the FEIE.
Of course, it's in your best interest to become a resident of a country that won't tax your business income. For example, Panama does not tax foreign sourced profits. If you sell to Panamanians, you pay tax on those gains. If you operate online, or sell to people outside of Panama, that income is not taxed in Panama.
For a list of countries that don't tax foreign sourced profits, see: Which Countries Tax Worldwide Income?
I selected Panama for this example because this country has a very easy residency program. Invest $20,000 in their reforestation initiative, and you're a resident. You can spend as much or as little time in Panama as you like to maintain your visa status. That is to say, Panama's reforestation visa program doesn't have a physical presence requirement.
President Trump's tax plan also taxes expats on our capital gains. Each and every cryptocurrency and stock transaction is going to be taxed in the United States. In fact, the US IRS is about to start and all out war on Crypto in 2018.
There are four ways for an expat to avoid US tax on capital gains. You can take your IRA offshore and trade in that account, those with $2 million or more can open an international life insurance policy, you can move to the US territory of Puerto Rico, or you can give up your US citizenship.
- For more on Puerto Rico, see: A Detailed Analysis of Puerto Rico's Tax Incentive Programs
Of these, trading in your US IRA is certainly the easiest. If you have a vested retirement account, you can move that account or accounts into an offshore IRA LLC and under your control.
Once your IRA is out of the US, you can invest in foreign rental real estate, cryptocurrency, stocks, physical gold (with some limitations), and just about anything else you wish. You'll become the investment advisor to the LLC, make the investments and send the wires on the account.
If you don't have an IRA, you might consider moving to the US territory of Puerto Rico. Qualifying businesses there pay 4% in corporate tax and 0% in capital gains tax on assets acquired after you become a resident of the territory.
I hope you've found this article on U.S. expat tax after President Trump's tax plan to be helpful. For more information on structuring your affairs abroad, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.
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